Reserve Bank tipped to hold key rate

The NZIER shadow board believes the Reserve Bank should leave the official cash rate on hold at 2.5 per cent when it reviews it tomorrow, but with a rise as the next best option.

The shadow board is a panel of nine economists and businesspeople the Institute of Economic Research asks to quantify their preference for various levels the bank could set its policy interest rate at. The results are then aggregated to give an indicator of which rate the bank should go for and the balance of risks around it.

In the latest poll the board has a 72 per cent preference for keeping the OCR on hold, as the markets are confident the bank will, and a 19 per cent preference for a rate increase.

"Inflation is low. Auckland's housing market is still at elevated levels, which presents risks. Views are mixed on the likely effectiveness of the Reserve Bank's restrictions on loan-to-value ratios (LVRs)," said NZIER chief executive Jean-Pierre de Raad.

"Internationally some emerging markets are becoming stressed as money returns to the US where yields are rising."

The Bank of New Zealand's head of research, Stephen Toplis, said the appropriateness of current interest rate settings would largely depend on the monetary policy impact of the recent LVR curbs.

"The greater risk is that these are seen as substitutes for rate hikes, allowing inflation to get away. However, there is a small offsetting chance that these restrictions bite really hard," he said.

Professor Viv Hall said that with monetary conditions still very accommodating, economic growth continuing to gather momentum and credit growth on the rise, non-tradables inflation and inflation expectations would continue to increase.

"I'm doubling my probability for a 25 basis point increase to 30 per cent and would have increased it further were it not for the short-term uncertainties associated with recently announced LVR restrictions," he said.

But MYOB executive director Scott Gardiner said: "According to our latest MYOB Business Monitor research, 25 per cent of small to medium businesses are looking to increase their prices in 2013" while 52 per cent are expecting interest rates to put at least some pressure on their business.